A couple years ago I wrote a post, The Myth of the Rational Consumer, in which I discussed evidence that customers really don’t want to change products or providers. I expanded on those views in a subsequent post The Myth of the Rational Consumer – Take 2. Much of the evidence I offered related to car owners who had selected specific brands and would not consider switching. Some recent events have demonstrated that although customers tend to be inert, if pushed too far, they will switch.
We are occasionally asked by clients or prospective clients to help them simplify their pricing. These requests are usually the result of the company struggling to manage the myriad prices they offer, but also often include a desire to make it easier to engage customers, or a desire to improve the margins on the lowest priced customers. In all cases, the companies want their overall profitability to improve. Unfortunately simplifying pricing is often not a good idea and can lower a company’s profits.
Many of us make New Year’s resolutions with great intentions, but perhaps miss carrying out some of them. Even if you made great progress this year, we hope you will join us in making and sticking to these resolutions. This is our fifth annual publishing of New Year’s Resolutions for Pricing
I am constantly reminded that customers don’t always behave the way the say they will, or the way we think they will. Earlier this month I read an article in the New York Times, Why Trying New Things Is So Hard to Do. Then over the weekend I read Dan Ariely’s column Ask Ariely, in which he cited the impact of the endowment effect. A couple years ago, I wrote a blog post, The Myth of the Rational Consumer, in which I discussed car loyalty. All these articles pointed to behavioral traits that make customers loyal.
Recently I had a conversation with a friend (let’s call her Helen) who wanted to buy a new iPhone, however she was frustrated that the iPhone 8 offers little in enhancements from her current iPhone 6. She was contemplating ordering an iPhone X. When I asked why Helen needed a new phone at all, she said her current battery would not hold a charge. When I said she could simply replace the battery, she responded, “I just want a new phone.” Although her current model has all the functionality she wants or needs, Helen is willing to pay something between $700 and $1,000 to upgrade. Our conversation got me thinking about the age-old problem of value pricing something that is very durable.
It’s business planning season! Right now, many companies are working hard to develop new price lists that will be effective early in January. These firms are analyzing their data to understand their competitive positioning, determine the differences in value between their own products and services vs. competitors, segment their customers, categorize their products, estimate changes in their cost structures, and confirm or revise their pricing strategies. To ensure all that work pays off in the form of improved pricing, it is important to demonstrate the courage to execute those well-developed plans and avoid the hubris that can sometimes cause firms to stick with ineffective pricing strategies.
Earlier this year, my wife and I moved to Florida. With year-round nice weather, palm trees and white sandy beaches, it seems like Paradise. Last week Hurricane Irma came through and reminded us of the true price of paradise. It also reminded me that buyers make trade-offs in every purchase decision, and your pricing strategies should understand and quantify the values of those trade-offs.
Much has been written in the past few weeks about the impact Amazon would have on the grocery industry after acquiring Whole Foods. The Washington Post called it “a clear signal of sweeping changes to come”, and the New York Times cited “the Amazon Effect” after comparing before and after prices on a basket of goods. The stock prices of Kroger and Walmart have dropped in anticipation of the revenue they will lose to Amazon. While I don’t know what Amazon will do, and I believe they will pick up some market share, I don’t think their pricing strategy will result in a price war.
Last week Andy Kessler wrote an article in the Wall Street Journal, The High Cost of Raising Prices, which might scare you into thinking you will ruin your business by raising prices. While I usually enjoy reading his articles and I found a few valid points, I mostly disagree with this article. Don’t fall for the scary stories and false correlations that could make you afraid to raise your prices. When the value you provide to your customers is greater than the price you are charging them, you can and should increase your prices to match the value.